IN RE GENERAL MOTORS COMPANY DERIVATIVE LITIGATION
Submitted: March 26, 2015
Robert J. Katzenstein and David A. Jenkins, of SMITH KATZENSTEIN & JENKINS LLP, Wilmington, Delaware; Robert D. Goldberg, of BIGGS AND BATTAGLIA, Wilmington, Delaware; OF COUNSEL: Nancy Kaboolian, of ABBEY SPANIER, LLP, New York, New York; Robert I. Harwood, Daniella Quitt, and Samuel K. Rosen, of HARWOOD FEFFER LLP, New York, New York; Gary S. Graifman and Reginald H. Rutishauser, of KANTROWITZ, GOLDHAMER & GRAIFMAN, P.C., Chestnut Ridge, New York; Peter Safirstein, Domenico Minerva, and Elizabeth Metcalf, of MORGAN & MORGAN, P.C., New York, New York, Attorneys for Plaintiffs.
William M. Lafferty, Susan W. Waesco, and Lauren K. Neal, of MORRIS NICHOLS ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for Individual Defendants.
Lisa A. Schmidt and Robert L. Burns, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Robert J. Kopecky and Joshua Z. Rabinovitz, of KIRKLAND & ELLIS LLP, Chicago, Illinois, Attorneys for General Motors Company.
GLASSCOCK, Vice Chancellor
The factual scenario underlying this matter is sadly familiar. An iconic American company produces a product or service that goes terribly awry, causing the company financial and reputational damage, and perhaps doing damage to society at large as well. A stockholder of the company wishes to sue derivatively on behalf of the company, to recoup its losses by holding directors liable under theories of breach of fiduciary duty. Because this potential lawsuit is a chose in action belonging to the corporation, whether to pursue it is within the business judgment of the board of directors. In order to bring the suit derivatively, under Court of Chancery Rule 23.1 the stockholder must plead facts demonstrating that a demand to bring the action was improperly refused, or, more typically, would be futile.
The requirement that plaintiffs demonstrate futility is-must be-rigorous. The purpose of Rule 23.1 is to prevent frivolous usurpation of a core director function by a stockholder, with all the distraction and chaos that would portend. If a mere allegation of liability on the part of the directors were enough to demonstrate a disabling self interest, conclusory allegations of breach of director duty would eat the rule whole, in a single bite. There is, of course, a whiff of irony, even tautology, in a Court determining, at the pleading stage, whether it would be futile to ask a director to decide, on behalf of her principal, to sue herself. This Court, and our Supreme Court, have endorsed different approaches to this problem in different situations; all, however, distill to the following principle: To survive a challenge under Rule 23.1, the complaint must make sufficient non-conclusory allegations to raise a reasonable doubt in the mind of the Court that a majority of the directors can exercise its business judgment on behalf of the corporation, in light of the directors' alleged conflicted interests.
Here, the results of the corporate activity in question are particularly distressing. This case involves ignition switches engineered and used by America's largest automaker, General Motors ("GM"), some of which malfunctioned during use of the automobiles by consumers. This has led to monetary loss on the part of the corporation, via fines, damages and punitive damages from lawsuits; reputational damage; and most distressingly, personal injury and death to GM customers. GM has been and will be held liable for any wrongdoing in the engineering and deployment of these ignition switches. The Plaintiffs here, GM stockholders, wish to recoup some of the loss on behalf of the corporation itself, alleging that the directors breached their duty of loyalty by failing to oversee the operations of GM. They failed to make a demand that the company bring this action, therefore, they must show that such a demand would have been futile, or face dismissal. The Plaintiffs have used section 220 to obtain corporate records to strengthen their pleadings; nonetheless, in my view, they have failed to raise a reasonable doubt that GM's directors acted in good faith or otherwise face a substantial likelihood of personal liability in connection with the faulty ignition switches. Accordingly, GM's motion to dismiss under Rule 23.1 must be granted. The facts and my analysis are below.
I. BACKGROUND FACTS 
In February 2014, GM issued its first of what would be 45 recalls over the next several months, covering a total of 28 million vehicles. Approximately 13 million vehicles were recalled due to issues with the ignition switch, including, among other model types, the Chevrolet Cobalt and Pontiac G5 of certain model i years. Specifically, the Plaintiffs explain, this ignition switch defect involved "the inability of the ignition to keep a car powered on by slipping from the 'run' mode to the 'accessory' mode, generally due to a modest bump to the key fob." This caused the vehicle's engine and electrical system to shut off, which disabled power steering and power brakes, and also caused the vehicle's airbag to not deploy in the event of a crash. The ignition switch defect has been implicated in a number of serious injuries and deaths.
The cost of recalls resulted in a total of approximately $1.5 billion charges against earnings through the first and second quarters of 2014. GM has also set up its Ignition Compensation Fund (the "Fund") to compensate victims of accidents caused by its vehicles' faulty ignition switches; at the time of the Complaint, the Fund had approved 23 death claims and 16 injury claims, and had received 1, 130 total claims. The Fund has no cap on overall payments.
"Shortly after this recall was announced, GM also disclosed that information relating to the defect had been known to certain engineers and other employees within the company for a number of years." As a result of the defects and recalls, GM is the subject of a number of products liability and personal injury lawsuits, class actions, two Congressional investigations, and a criminal investigation by the U.S. Department of Justice. GM paid $35 million to the government in fines, the maximum civil fine and the highest in history, for its violation of the National Traffic and Motor Vehicle Safety Act of 1996 (the "Safety Act").
The Plaintiffs seek to hold GM's board of directors (the "Board") personally liable in connection with these losses, not because the Board was complicit in the defect, but because it did not know about it until February 2014. Specifically, the Plaintiffs allege that the Board lacked a process by which it would be advised of National Highway Traffic Safety Administration ("NHTSA") inquiries and the responses thereto. More generally, they argue that the Board lacked a mechanism by which it received information about safety risks and the risk of punitive damages in pending litigation.
The Plaintiffs allege that demand in this case would be futile because a majority of the Board is disabled from considering demand due to a substantial likelihood of personal liability in connection with their failure to oversee GM.
A. The Parties
The Plaintiffs are GM stockholders and have continuously maintained their ownership since November 2010, which the Plaintiffs define as the relevant period.
2.Current Director Defendants
Mary T. Barra has been the Company's Chief Executive Officer and a member of the Board since January 15, 2014. She was previously the Executive Director of Vehicle Manufacturing Engineering of Old GM until July 2009, Senior Vice President of Global Product Development at the Company from February 2011 to August 2013, and then Chief of Product Development. Prior to 2009, Barra also "had management responsibilities in various engineering and staff positions at the Company."
Theodore M. Solso, who has been a member of the Board since June 2012, is currently its non-executive chairman. He is also on the Audit Committee.
Stephen J. Girsky has been a member of the Board since July 2009. Girsky has been Vice Chairman of Corporate Strategy, Business Development, Global Product Planning, and Global Purchasing and Supply at GM since February 2011, and Vice Chairman of Corporate Strategy and Business Development since March 2010.
Patricia F. Russo has been a member of the Board since July 2009 and has served as its Lead Director since March 2010.
Thomas M. Schoewe has been a member of the Board since November 2011 and is the chairman of the Audit Committee.
Erroll B. Davis, Jr. has been a member of GM's board since July 2009 and was a member of "Old GM's" Board from 2007 to 2009. He is a member of GM's Audit Committee.
Kathryn V. Marinello has been a member of GM's Board since July 2009. Marinello also served on Old GM's Board from 2007 to 2009. Marinello has served as a member of GM's Audit Committee since at least 2010.
E. Neville Isdell has been a member of GM's Board since July 2009 and previously served on Old GM's Board from 2008 to 2009. Isdell is also a member of the Audit Committee.
Carole M. Stephenson has been a member of the Board ...